Comparing Medicare and Private Health Insurance Spending

Limiting the
growth of health care spending is a top priority. Comparing the
performance between Medicare and private insurance is receiving
most of the attention, with some arguing that Medicare cost control
has been more effective over the long term than private-sector
efforts.

Examining several
data sources -- with results displayed below -- suggests that
Medicare does not have an advantage over the private sector in
limiting the growth of health care spending.

We examined and
graphed data from the National Health Accounts for 1970 through
1999. These data are from the Office of the Actuary, Center for
Medicare and Medicaid Services. We also examined data from the
National Medical Care Expenditure Survey (NMCES) and the Medical
Expenditure Panel Survey (MEPS).

It should be noted
that the calculations are confined to spending for hospital and
physician services. Those services are common to both private
insurance and Medicare, and represent the bulk of health spending.
By limiting the analysis to services covered by both types of
insurance, we avoid attributing to the private sector an increase
in cost resulting from coverage of services not offered by
Medicare, such as prescription drugs.

Health policy
analysts and policymakers will find that the data reveal several
crucial points in comparing Medicare and private health insurance
spending over time.

Private insurance
became more generous over the period. In 1970, private
insurance paid for 59.6 percent of total private spending on
hospital and physician services. By 1999, insurance paid for 85.4
percent of the total.

The percentage of
health spending that was paid directly out of the pockets of
beneficiaries declined as insurance financed a growing share of
health services.

Over the past 30 years, although private insurance costs rose more
quickly than Medicare, cost per unit of private coverage grew
more slowly.

The gap between higher Medicare costs and lower unit costs of
private insurance first appeared in the late 1970s and has widened
in recent years.

We were unable to
adjust Medicare spending for possible increases in Medicare's
generosity because of data limitations of the National Health
Accounts. Data on spending for all health services from NMCES for
1977 and MEPS for 1996 provide evidence of the Medicare program's
lagging generosity. We calculated the percent of total spending
paid by private insurance for people under age 65 and the
corresponding percent of total spending paid by Medicare for people
65 and older.

The value of
Medicare is not keeping pace with private insurance. For
persons under age 65, the generosity of private health insurance
grew by 41.5 percent between 1977 and 1996. For persons 65 and
older, the generosity of Medicare grew by only 22.2 percent over
the same period.

Conclusion

Although private insurance spending has risen faster than Medicare
spending over the past 30 years, the value of private
insurance has grown just as rapidly. These data suggest that
Medicare does not have an advantage over the private sector
in limiting the growth of health care spending.

Comparisons using
National Health Accounts data cannot prove the superiority of one
model of cost containment over the other. Private insurance
spending includes spending on behalf of Medicare beneficiaries,
many of whom have their Medicare coverage supplemented by private
retiree policies or private Medi-gap insurance. The spending data
cannot account for differences in the age, health status, or other
characteristics of the beneficiary population, all of which clearly
affect the use of health services. The direction of any bias caused
by inadequate data cannot be determined.

Joseph R. Antos,
Ph.D., is Wilson H. Taylor Scholar in Health Care and Retirement
Policy at the American Enterprise Institute and a former Assistant
Director for Health and Human Resources at the Congressional Budget
Office. Alfredo Goyburu is a Policy Analyst in the Center for Data
Analysis at The Heritage Foundation.

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Although private insurance spending has risen faster than Medicarespending over the past 30 years, the value of private insurance hasgrown just as rapidly. These data suggest that Medicare does nothave an advantage over the private sector in limiting the growth ofhealth care spending.

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